Europe’s bonus clampdown hits two-thirds of fund managers

The European Parliament’s vote to cap bonuses in the asset-management industry could affect two-thirds of senior fund managers in the U.K., U.S. funds in Europe and hedge funds open to small investors.

Bonuses should not exceed base salaries for managers of mutual funds regulated by the European Union, known as UCITS, European lawmakers in the economic and monetary affairs committee voted yesterday. The rules would cover 5 trillion euros ($6.5 trillion) of assets in UCITS, which include funds managed outside Europe and some linked to hedge-fund strategies such as John Paulson’s New York-based Paulson & Co. and Och-Ziff Capital Management Group LLC.

“If the final rules are even close to what has been agreed today, then this will fundamentally change the way asset managers are paid,” said Jon Terry, a partner at PricewaterhouseCoopers LLC. Asset managers “are now facing the toughest pay rules across the whole of the financial-services sector.”

Flushed with the success of overhauling bank-capital rules that banned bankers’ bonuses of more than twice fixed pay, European policy makers are pressing for tougher rules on fund managers to eliminate what German lawmaker Sven Giegold called the industry’s “gambler mentality.” Fund managers will respond by increasing fixed salaries, moving overseas and pulling products from Europe if they can’t dilute the rules, industry lobby groups said.

Parliament Vote

Managers’ “base salary will increase, they will relocate to another country or move completely away from any type of EU bank or fund manager,” said Hakan Enver, operations director for financial services at recruiter Morgan McKinley. “Financial-services organizations may also become more savvy in the way they remunerate their high-earning employees.”

The committee’s proposal sets the stage for a vote by the full European Parliament before negotiations with national diplomats can start. The pay curbs are in addition to proposals made by Michel Barnier, the EU’s financial-services chief, last year to strengthen regulation of UCITS funds, which are allowed to be sold within the 27-nation trading bloc.

“I would favor something more tailored rather than applying a cap across all financial-services legislation -- especially when you consider that UCITS do not benefit from the same implicit taxpayer guarantee or monopoly on liquidity and intermediation that banks do,” said Sharon Bowles, chairwoman of the committee and a Liberal Democrat from the U.K. “I think there will be scope to make adjustments.”